Deere: A Stock for Patient Investors Only

Falling commodity prices will weigh on shares for a long time

Deere (DE) served up one of Wall Street’s favorite meals Wednesday — a beat-and-raise quarter — but it might be a while before the world’s largest manufacturer of agricultural equipment can do it again.

Prices for key agricultural commodities are declining sharply, and there’s no telling where the bottom is.

Deere beat the Street’s quarterly earnings and sales projections by comfortable margins, thanks to strong results in the U.S., Canada and South America, notably Brazil.

But that’s probably not enough to get the share price out of its long-term funk.

Deere had a huge run along with rising prices for agricultural commodities in the couple years after the end of the recession. The stock more than tripled from about $30 a share in early 2009 to more than $90 by early 2011.

But then agricultural commodities started to stumble, entering a longer term downtrend — notwithstanding a drought-induced spike to all-time highs last summer — and Deere started to underperform. Have a look at the five-year chart below:

For the year-to-date, Deere’s off more than 2%, trailing the S&P 500 by more than 20 percentage points. Over the last 52 weeks, shares are up about 6%, lagging the broader market by 15 percentage points.

What’s troubling is that the outlook for agricultural commodity prices is more weakness ahead. The U.S. Department of Agriculture expects 2013 to be a record-breaking year for corn, rice, soybeans and wheat production.

Those all-time bumper crops will keep prices under pressure, forcing farmer to cut back on their capital spending. They just won’t be buying as many tractors and combines if their profits are cut back.

And since the U.S. and Canada are Deere’s biggest market, accounting for nearly two-thirds of sales last year, declining prices for corn, wheat, rice and soybeans are a serious headwind.

True, fertilizer prices are falling and they’re typically a farmers’ single-biggest cost. That should help boost demand for tractors during planting season next spring. But beyond that, in the short- to medium-term, it’s hard to see catalysts for Deere’s stock.

After all, even after the beat-and-raise quarter, shares dropped in early Wednesday trading.

For the long haul, Deere looks good here, if only because the stock is cheap on a relative valuation basis and the outlook for the global agricultural demand is a no-brainer. World population is expected to hit 9.5 billion by 2050, up from about 7 billion today.

That’s a lot of mouths to feed.

Meanwhile, the stock trades for just 10 times forward earnings, or more than 25% below its own five-year average, according to data from Thomson Reuters Stock Reports. Throw in the dividend yield of 2.5% (vs. the five-year average of 2.3%) and shares look to be on sale.

That is, if you have long enough horizons.

For the next few quarters, at least, falling commodities prices give Deere a tough row to hoe.

As of this writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.